Monetary Policy and the FOMC
This material was originally created for
Starting Point: Teaching Economics
and is replicated here as part of the SERC Pedagogic Service.
and is replicated here as part of the SERC Pedagogic Service.
Initial Publication Date: January 7, 2011
Summary
The student will read two Federal Open Market Committee (FOMC) press releases, dated a year apart, and determine what changes there have been in the macroeconomy, what economic variables are in the FOMC objective function, and relate both the macroeconomic situation and policy within the context of the macro model they are using in class.
CollapseLearning Goals
Students will:
- become familiar with the macroeconomic variables important to the Federal Reserve System (FOMC),
- recognize the variables in the objective function of the FOMC,
- analyze the change in the economic situation over a year's time, and
- apply the course model to the current macroeconomy.
Context for Use
This exercise would be applicaable in either a macro principles or an intermediate macro course; in a monetary policy course one might have the students read the minutes instead of the press release. Students should already have some knowledge of a macro model in which to analyze monetary policy.
Description and Teaching Materials
Students should read two FOMC press releases dated one year apart. To have some control over the desired answers, the instructor should supply the specific press releases. However, the press release can change from year to year to that the exercise is always fresh. The FOMC press releases can be found at: http://www.federalreserve.gov/monetarypolicy/fomc_historical.htm. The students should read the press relases and answer the following questions:
- What are the primay macroeconomic trends in the last year?
- What are the economic variables on which the FOMC focuses? In other words, what are the economic variables in the FOMC objective function?
- Explain in your own words or with a graph, using the macro model developed in class, what has occurred in the economy in the last year.
- Given the economic situation you presented in question 3, what will occur in the long run if no other policy actions are taken?
Teaching Notes and Tips
This activity provides the student with the opportunity to learn about the preferences of the FOMC, current macro events, how to analyze macoreconomic events in the theoretical model used in class, and recognition that policy results may differ in short run effects versus long run effects.
You could have your students do this activity individually and then, in class, in groups of two reach a consensus and present their ideas to the class. How many student groups present depends on class size.
You could have your students do this activity individually and then, in class, in groups of two reach a consensus and present their ideas to the class. How many student groups present depends on class size.
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Assessment
The answers to the first and third questions are the most important. If a student cannot answer the first question, he/she probably cannot answer the third question well.
So for questions 1 and 2, I look for no attempt (1 point), an attempt with little understanding (2 points), a grasp of most of the economic trends (some of the variables in the FOMC utility function) (3 points), and a firm grasp of current economic trends (recognition that FOMC is faced with a trade-off between inflation and unemployment/growth)(4 points). In question 3, I am looking for knowledge of the original equiibrium point, the new equilibrium point, an explanation of how the economy might have gotten from point A to B. If the explanation is abstract and does not refer back to data presented in the press releases, few points are given. On Question 4, I am simply looking for some idea that there are differences between short run and long run outcomes.
So for questions 1 and 2, I look for no attempt (1 point), an attempt with little understanding (2 points), a grasp of most of the economic trends (some of the variables in the FOMC utility function) (3 points), and a firm grasp of current economic trends (recognition that FOMC is faced with a trade-off between inflation and unemployment/growth)(4 points). In question 3, I am looking for knowledge of the original equiibrium point, the new equilibrium point, an explanation of how the economy might have gotten from point A to B. If the explanation is abstract and does not refer back to data presented in the press releases, few points are given. On Question 4, I am simply looking for some idea that there are differences between short run and long run outcomes.